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Viability report

Code in force: 1 August 2022

A viability report must contain the followingVI1:

  • The effective date of the viability report.
  • The name of the scheme that the report has been prepared for.
  • The name and contact details of the person to be contacted about the report.
  • A statement, signed by the trustees, confirming that in their opinion the design of the scheme is sound and that the viability report has been approved by the trustees.
  • A statement, signed by the scheme actuary, confirming they are satisfied that the actuarial matters referenced in the viability report accurately reflect those matters in respect of the scheme (if the scheme actuary cannot provide this statement, the viability report will not be compliant).
  • An explanation of the design of the scheme, including:
    • how the scheme is a CDC scheme under s1(2) of the Act
    • how the scheme meets the requirements for a qualifying scheme in section 3 of the Act
    • how the trustees are satisfied that the rules of the scheme meet the requirements in the Act and the Regulations about the calculation and adjustment of scheme benefits
  • An explanation of why the trustees consider the design of the scheme to be sound and the evidence on which this is based.

In considering whether the scheme design is sound, the trustees must consider the written advice obtained from the actuary under regulation 10(3)(b). This advice must explain the actuary’s conclusions on the matters that they must consider to provide the viability certificate, and the assumptions they used to carry out the gateway tests or live-running tests.

The actuary must explain the assumptions being used, for example expected returns on assets, inflation and mortality, and explain how they are justified. The document must also include an explanation of the testing or modelling being considered by the trustees, including the results of this testing or modelling.

In explaining the design of the scheme, and whether it is sound, the trustees should show they have taken appropriate investment advice and used it to develop an appropriate investment strategy for the scheme. We expect trustees to explain how their investment strategy supports the scheme’s design. This explanation should clearly reference key points from the statement of investment principles, investment strategy and advice. These documents should be submitted to us alongside the viability report as part of the trustee’s evidence for why they are satisfied the scheme design is sound.

When providing their advice, we expect the scheme actuary and the individual providing advice supporting the investment strategy to engage with each other.

Both the viability report and the actuarial advice underlying the viability certificate must explain how the scheme rules meet the legislative requirements on benefit calculation and adjustments, with relevant extracts of the trust deed and rules. We therefore expect trustees to obtain legal advice on these matters and share it with the scheme actuary.

Testing and modelling in respect of the scheme

The assumptions used in testing and modelling should be central estimates, except where this is for the purposes of examining sensitivities to changes. Their use, including how they are considered to be central estimates, should be justified in the scheme actuary’s advice to the trustees, along with their associated volatilities.

Trustees should understand the key assumptions that underlie any modelling they receive and consider the impact of making alternative assumptions. It will also be important to test changes in assumptions separately from market movements. Advisers should be transparent with their clients about the key assumptions that influence the model output.

The modelling and testing should examine how the scheme would be affected by changes to market or economic circumstances, and include an examination of the main circumstances in which the scheme’s design might no longer be sound. These may include:

  • the number of members entering the scheme falls materially in the future
  • circumstances in which there might be significant cuts to benefit
  • significant numbers of members transferring out their pension

We expect the modelling and testing undertaken and provided to the trustees to include stochastic asset liability modelling (ALM) alongside an explanation of assumptions and inputs. This should provide assurance that outcomes are consistent with what is communicated to members, as well as providing trustees with a measurable way of understanding the variability of outcomes, to support trustee decisions. If modelling is based on an existing known model, then any changes to the underlying model should be explained. We do not expect new ALM every year. New ALM should be undertaken where the trustees consider it necessary, for example, significant changes to the expected returns on the scheme’s investments, volatility of the scheme’s investments, and longevity assumptions to provide outputs that can be relied on to inform the necessary decisions.

Where schemes allow for member options, trustees should understand the impact of how these are determined on the underlying scheme design. We expect, as part of the testing and modelling at authorisation, that trustees have understood this, for example as part of the modelling of members transferring out or seeking early retirement.

Legal references

VI1 Part 2 of Schedule 2 to the Regulations